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Report No. 29

Category 2.-Evasion and Avoidance of Tax

98. Evasion, etc. of tax (Category 2).-The second category of offences mentioned by the Santhanam Committee is-

"Evasion and avoidance of taxes lawfully imposed".

At another place in the Report1, the Committee discussed in detail the topic of evasion and avoidance of income-tax, and enumerated certain sections of the Income-tax Act, 1961, which appeared to the Committee to offer scope for avoidance and evasion2. The Committee observed, that the Department itself should examine and take suitable steps to plug loopholes on these matters; it suggested certain administrative measures, as well as two changes of a legal nature, namely, (i) making the income-tax offences of illegal evasion and avoidance cognizable and non-compoundable, and (ii) a provision that the punishment should be imprisonment for at least three years, and the amount found to be evaded or avoided, should be liable to forfeiture.

It may also be noted, that so far as evasion of customs duty is concerned, the Report of the Committee contains a detailed discussion as to smuggling3.

1. Report of the Santhanam Committee, pp. 271 and 272, items (vii) and (viii).

2. Those sections are listed in Appendix 10 to this Report.

3. Report of the Santhanam Committee, p. 19, para. 3.15 and p. 281.

99. "Evasion" and "avoidance".-It is unnecessary to elaborate here the distinction ordinarily understood between "evasion" and "avoidance". The former denotes a defect in the enforcement of the laws, while the latter denotes a defect in the law itself. The latter has to be tackled by a detailed study of the provisions of the relevant enactments.

100. The following extract from the Report of the Income-tax Investigation Commission1, which was presided over by Sir S. Varadachariar, former Judge of the Federal Court, lucidly explains the distinction between the two:-

"It remains to add a few observations relevant to the problem of avoidance and evasion. According to well-established usage, the term "avoidance" denotes the utilisation of loopholes to effect tax saving, within the letter though perhaps contrary to the spirit of the law. It is rendered possible by defects in the framing of the law or in its drafting, as a result of which cases within the intendment of the law have not been brought in by clear or apt words, or cases which ought to be fairly comprised within the policy of the law have been omitted by oversight or for other reasons. Leakage of tax in this way has to be prevented by making the law clearer or wider; but there will never be an end to attempts at income-tax avoidance.

Though a Lord Chancellor some years ago referred in terms of disapprobation to the efforts of tax dodgers and to "the professional gentlemen who assisted them in the matter2" (Latilla v. Inland Revenue Commissioner, LR 1943 AC 381 : (1943) 1 All ER 255 (256) (HL),) popular or professional opinion does not seem to share that view but is prepared to regard such attempts as a "commendable exercise of ingenuity". As courts are slow to construe tax laws according to their "intent" (as distinguished from the letter of the law), occasional modifications of the statute will be necessary to close loopholes that "judicial construction cannot plug". "Evasion" is applied to the escape from taxation, accomplished by breaking the letter of the law, whether intentionally or through mistake or negligence. Most frequently, taxes are evaded because proper administrative machinery has not been provided or the machinery is not working properly. Evasion has therefore to be combated mainly by "improving" the administration of the law-we advisedly say "improving" though some would prefer to speak of it as "tightening" the administration.

"To the extent to which the weaknesses of the administration may be traceable to defects in the law (particularly in the sanctions provided by the law), some changes in the law may be necessary even to prevent evasion. Under a system where the assessment of the tax depends to a large extent upon information given by the assessee, he has every opportunity, and, when the rate of tax is high, every temptation, to attempt evasion. This can be met only by improving the efficiency of the administration".

1. Report of the Income-tax Investigation Commission, (1949), p. 7, para. 18.

2. Cf. I.R.C. v. Duke of Westminster, 1936 AC (I) 19: 1935 All ER Reprint 259 (267) (HL).

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